There’s a lot of commentary about the French and Greek elections this week. Some of it is rather apoplectic (more deserved in Greece than France), but for all the talk of extremism, a lot of the debate misses the mark. What really matters, and what is just as applicable in this country as elsewhere, is that this election should be about who is being proven right about the economy, and who is not.
For too long, the debate about the economy has taken on a “Shape of the planet: views differ” sheen. In reality, though, the two major approaches to the financial crisis have been starkly different, with very evident (and testable) hypothesized outcomes. To wit (and for lack of better group nomenclature):
- Austrians: The best thing to do is to massively cut government spending. Doing this will make the business community more confident, lowering interest rates and leading to growth. Stimulus spending will only lead to higher interest rates and inflation.
- Keynesians: Austerity will only cut growth and make things worse. Ordinarily, running budget deficits would increase inflation, but when you are in a liquidity trap, inflation and interest rates will not rise. Take advantage of free money.
As you can see, both sides have predictions. Austrians (and yes, I know that Milton Friedman himself would disagree with this characterization of his views, but anyway…) say that austerity leads to growth, and stimulus leads to inflation and higher interest rates. Keynesians say that austerity makes things worse, and stimulus in a liquidity trap doesn’t lead to inflation and higher interest rates. What does the data say?
First, cutting government spending kills the economy. In no country has austerity led to growth or lower interest rates. Austerity has made things worse, and it is no wonder that voters are punishing incumbents.
At the same time, in the U.S., which hasn’t embraced austerity, and despite worries about “bond vigilantes” and the inflation bogeyman, inflation remains low (and falling) and interest rates just fell below zero in real terms on 10-year notes. Notice, too, that mortgage rates continue to be at historic lows.
In short, nothing that the Austrians predicted has happened. Everything that the Keynesians predicted has happened. There is no debate. It’s settled everywhere but in public sentiment.
That’s not to say that there are easy answers to the crisis. In Europe particularly, the answers range from terrible (continued austerity) to ghastly (breakup of the Euro) to unimaginable (increased inflation to help out countries not ending in “-ermany”). We are in no way out of the woods yet. Bad things will continue to happen.
Let’s not pretend, however, that the “very serious people” who have been pushing austerity for years and just (and rightly) got the boot in France and Greece had a workable idea. They didn’t. History has proven them wrong. It’s time to point that out.